Issues on the Measurement of the Solow Residual and the Testing of its Exogeneity : A Tale of Two Countries

Using aggregate U.S. and Canadian data, this paper examines the implications for the empirical assessment of market structure and exogeneity of productivity shocks of correcting the Solow residual for variation in capacity utilization. In contrast to most studies, not accounting for capacity utilization, our results suggest that the U.S. and Canadian market structures are well described by constant returns to scale and perfect competition. They also suggest that Canadian productivity shocks are exogenous to real and monetary variables, while U.S. productivity shocks become exogenous to narrowly defined monetary aggregates and monetary policy innovations when the capital stock is adjusted for variations in utilization rates